European companies lagging on climate change reporting

Less than half (44%) of the largest European companies explain in their management reports how their business models are affected by climate change or environmental challenges, a review of company reporting under the EU’s environmental reporting law has found

The research, published by environmental non-profits organisation the Climate Disclosure Standards Board (CDSB) and global disclosure charity CDP, analysed the annual reports of the 80 biggest publicly listed companies in Europe, representing a combined market capitalisation of €3.75 (£3.32) trillion.

It is based on five reporting demands in the Non-Financial Reporting (NFR) Directive, the EU legislation obliging companies to report their management of social and environmental matters.

Overall, the review found low uptake of the directive’s new requirements in companies’ annual reports, along with reporting inconsistencies that make it more challenging for investors, concerned about environmental risks, to compare information. However, both France and the UK demonstrate greater reporting compliance than other EU countries.

The findings show that less than half (48%) of the sample describe their due diligence processes for climate and environmental risks; only 13% identify the time horizon associated with an identified climate or environmental risk; and 39% of all companies disclose scope 1, 2 and 3 emissions and only 41% disclose greenhouse gas (GHG) emissions targets.

Three in four company reports include a business model description that falls short of EU guidelines. French companies lead (57%) on referencing to climate or environmental issues in their business models.

The review also revealed a large gap between companies’ stated risks and the actions to address them. while 79% of company reports identify at least one climate or environmental risk, 80% do not cite a specific climate change strategy to mitigate these risks.

Only 41% of company reports disclose transition risks, such as future regulation and policy changes, which are likely to have material business impacts.  

The research suggests countries which already had requirements in this area are performing better. All French and UK company reports include current emissions, compared to just 56% in Germany and 81% EU-wide. Less than half (41%) of annual reports include targets to reduce emissions.

Mardi Mcbrien, CDSB managing director, said: ‘Climate and environmental information is material for an understanding of these large businesses and must be presented to investors in a consistent and comparable way. The way to help companies achieve this is to clarify and strengthen the NFR directive by specifying its requirements.’

The review also analysed how far current reporting practices align with the recommendations of the G20 Financial Stability Board’s task force on climate-related financial disclosures (TCFD), which represents a new best practice in climate change reporting and is endorsed by the European Commission.

Just over a third of companies (38%) reference the TCFD in their annual report, showing implementation is already underway. But while 60% of companies disclose that responsibility for environmental issues sits with a board member, only 15% mention climate change specifically, which is a key TCFD recommendation. The UK (31%) and France (21%) again are the leaders, while some firms now link environmental or climate targets to management remuneration.

Threequarters of companies disclose board-level oversight of climate and environmental issues while a smaller proportion discloses management’s role of the same (64%). However, only one company reviewed (Unilever) has conducted and reported fully on its climate-related scenario analysis and has disclosed details of this analysis, including key assumptions and impact to the company and strategy.

Mcbrien said: ‘While we have seen progress by companies on such disclosures, all companies need to discuss the impact of climate change on their business, as outlined by the TCFD recommendations. Aligning these recommendations with the NFR directive presents an opportunity to streamline the EU corporate reporting landscape.’

First Steps: Corporate climate & environmental disclosure under the EU Non-Financial Reporting Directive is here.

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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